The Term Structure as a Predictor of Real Economic Activity




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    • Estrella is Assistant Vice President, Banking Studies and Analysis, Federal Reserve Bank of New York, New York, NY 10045. Hardouvelis is Associate Professor of Finance, School of Business, Rutgers University, New Brunswick, NJ 08903, and a Research Adviser at the Federal Reserve Bank of New York. We would like to thank John Campbell, Campbell Harvey, two anonymous referees, the co-editor David Mayers, the seminar participants at Rutgers, at the Federal Reserve System meeting of April 1989, and at the American Economic Association meetings of December 1990 for useful comments, and, for research assistance, James Chow. The views expressed in this article are our own and do not reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.


A positive slope of the yield curve is associated with a future increase in real economic activity: consumption (nondurables plus services), consumer durables, and investment. It has extra predictive power over the index of leading indicators, real short-term interest rates, lagged growth in economic activity, and lagged rates of inflation. It outperforms survey forecasts, both in-sample and out-of-sample. Historically, the information in the slope reflected, inter alia, factors that were independent of monetary policy, and thus the slope could have provided useful information both to private investors and to policy makers.